How Are SFA Grant Recipients Investing That Money?

As of today, the Pension Benefit Guaranty Corporation has granted about $53.4 billion to struggling multiemployer plans that had either cut or were considering benefits reduction to their roughly 767,000 participants.

The money was allocated through the Special Financial Assistance Program established by the American Rescue Plan Act of 2021. A pension fund may qualify if it is insolvent, it is in critical and declining status, or it enacted a benefit cut under the Multiemployer Pension Reform Act of 2014.

The PBGC requires recipient pension funds to invest at least two-thirds of the grant money in investment-grade fixed-income securities, but the remaining third may be invested in “return seeking assets,” though plans are not required to invest anything in RSAs.

The distinction between the two categories was recently clarified by the PBGC. IGFI can include Treasury bonds, investment grade debt and money market funds. RSAs include common U.S. stock and stock funds registered with the Securities and Exchange Commission.

Determining Asset Allocation ‘a Big Lift’

Colyar Pridgen, a lead pension solutions strategist at Capital Group, says recipient plans generally take one of two approaches to investing SFA funds. The first is to view SFA funds as being “in a bit of a silo” by keeping their legacy assets invested as they were previously and deciding how to best maximize the SFA funds. The other approach is to look at “the best overall solution” by pooling all of a plan’s assets into one strategy and then checking to be sure that strategy is compliant with PBGC regulations for the SFA funds.

Pridgen explains that since PBGC funds are legally constrained, it may be “sensible to inject a bit of risk into non-SFA assets.” Some plans have taken on greater equity and illiquidity risks with their legacy assets or invested in the “more exotic areas of fixed income” such as private or high-yield debt.

Though this might sound sensible, Pridgen says that “in practice, we see some of that, but not as much as might be expected.” He says this is because “it is a big lift to invest these SFA assets and to revisit all of their asset allocation.”

It is also difficult for pension trustees to examine the trade-offs between long and short investments and the needs of their older and younger participants. They are therefore disinclined to make significant changes in risk tolerance or overall strategy, even if the SFA grants might superficially seem to be giving them an opportunity to do exactly that.

The appetite to revisit old investment strategy varies from plan to plan, and “there hasn’t been a single convergence” in terms of how SFA money is being invested, Pridgen says, saying SFA investing strategies have been “fairly plan-specific.”

Conservative Approach Continues

Michael Scott, the executive director of the National Coordinating Committee for Multiemployer Plans, agrees that investment strategies are largely considered case by case but says SFA recipient pension funds have been acting rather conservatively.

The interim rules governing SFA financing used interest rate assumptions that made using IGFI assets an unfeasible investment strategy to maintain long-term solvency. To make matters worse, under those rules, SFA recipients could only invest in IGFI.

The final rules, adopted by the PBGC in July 2022, used a lower discount rate assumption and were therefore more favorable to an IGFI-focused strategy, Scott says. Additionally, higher interest rates made IGFI even more attractive to pension plans. The combination of those market and regulatory factors have led pension funds to invest their SFA money conservatively, and most plans have not been filling up their RSA “bucket,” according to Scott.

Central States: Too Early to Tell

Concerning legacy assets, Scott explains that many plans were in such bad shape that they had few legacy assets to speak of. One plan that did have significant legacy assets, the Central States plan, has historically followed a conservative strategy, Scott says, and even after having received SFA funding, it has continued to pursue an IGFI-driven portfolio.

The Central States, Southeast & Southwest Areas Pension Plan received $35.8 billion in special financial assistance in December 2022, bringing its total assets at the end of 2022 to $42.6 billion. The actuarial value of the funds’ assets at the end of 2022, excluding SFA money, was slightly less than $6 billion.

In its Form 5500 from 2022, received by the Department of Labor on October 12, 2023 but finalized just days after the 2022 SFA approval, Central States stated, “It is not yet known what the updates to the investment policy will be” until the PBGC finalizes the size of the grant and the investment restrictions.

Scott adds that the most common asset managers for SFA assets have been “J.P. Morgan [Asset Management], BlackRock, BNY Mellon, Loomis Sayles, Invesco and similar asset managers.”

According to Form 5500 submissions from 2021 and 2022, Central States used Northern Trust Investments, Mellon Investments Corp., BNY Mellon and BlackRock Financial Management as its investment service providers. The fees paid to these managers stayed largely stable despite the large cash inflow, no doubt because the grant came in the final weeks of the year. The largest increase in year-to-year fees was for Mellon Investments Corp., which received $3.1 million from Central States in 2022, up from $1.9 million in 2021, according to the filings.